Expert Analysis of Today's Market

• The dollar rose on stronger-than-expected US retail sales. Higher US equity prices gave renewed interest in carry-trades. The dollar pared gains against most key currencies after yields came off their highs in New York trading while the yen remained close to a 5-year low. Our short USD/JPY position stopped out. The yen and Swiss franc were the weakest today.


• The EUR/USD is testing support from the 1.33 handle. The pair fell initially on strong US retail sales data but pared losses as it was unable to break support. The pair is oversold possibly requiring some consolidation before moving lower.

Financial and Economic News and Comments

US & Canada

• US retail sales increased a stronger-than-forecast 1.4% m/m in May following a revised 0.1% drop in April, the Commerce Department said. Retail sales excluding autos rose a more-than-expected 1.3% m/m. Retail sales rose 5.0% versus last year, 4.6% excluding autos. Sales rose across all categories and particularly autos and gas. May retail sales were significantly higher than in the beginning of this year.

• US business inventories rose 0.4% m/m in April to a seasonally adjusted $1.399 trillion, after remaining unchanged in March, the Commerce Department said. The rise was the strongest since September suggesting a positive contribution to Q2 GDP growth. Business sales rose 0.7%. Inventory to sale ratio fell to 1.27 in April from 1.28 in March and up from 1.26 a year ago.


• Not labeling China as a currency manipulator, the US Treasury’s semi-annual foreign exchange report said the yuan “is undervalued and market sentiment clearly favors appreciation.” The report said China should not hesitate any longer to take more vigorous action to rebalance its economy and promote yuan movement to tackle its imbalances and achieve a greater flexibility in its FX regime. Today’s rally in the bond market is in response to that China was not seen as a currency manipulator; however, Congress is likely to dismiss this report as trade action against China gains momentum. Protectionist measures will lead to higher inflation and interest rates in the US.


• US import prices rose a stronger-than-expected 0.9% for May, the Labor Department reported. Excluding petroleum, import prices still rose 0.5%. Export prices increased 0.1% (0.2% ex-agriculture). The data show strong growth and higher overall inflation.


• Bank of Canada Governor David Dodge said current market conditions do not merit any intervention in the FX market to stem the rise of the Canadian dollar. “We haven’t had disorderly markets, which is one of the key issues, nor have we seen an issue where somehow currency alignment has gotten way, way out of line.”

Europe

• UK jobless claims declined more-than-expected 9,300 to 880,400, the Office for National Statistics said. The unemployment rate held steady at 5.5% in Q1 2007 as both the number of employed and unemployed fell.


• The monetary policy of the European Central Bank remains on the accommodative side and the ECB will closely monitor all developments in view of upside risks to price stability, Governing Council member Erkki Liikanen said.

Asia-Pacific

• Japan’s current account surplus surged 50.3% y/y to ¥1.99 trillion ($16 billion) in April, the Ministry of Finance said. Exports rose 7.3% and imports grew 3.2%.


• Japan’s April industrial production fell 0.2% m/m, revised down from the initial estimate of a 0.1% fall, the Ministry of Economy, Trade and Industry said. From a year earlier, April production increased 2.2% after a 2.0% rise in March.


• China’s retail sales rose a stronger-than-expected 15.9% y/y in May to 715.8 billion yuan ($94 billion) after gaining 15.5% y/y in April, the Statistics Bureau said.


• Foreign direct investment in China grew 9.9% y/y in the first five months from a year earlier. Spending by overseas companies rose to $25.26 billion, the Ministry of Commerce said. Foreign direct investment in May climbed 8.7% y/y to $4.9 billion.


• Australia’s consumer confidence index fell 2% m/m in June to 121.5, according to a Westpac Banking Corp. and Melbourne Institute survey.


• Japanese investors took advantage of the higher foreign yield and bought more overseas assets than they sold in May, with Ministry of Finance figures showing they bought a net ¥808.9 billion ($6.6 billion) of foreign bonds and the Investment Trusts Association of Japan saying purchases of bonds and stocks reached a record ¥33.46 trillion ($273.8 billion).

FX Strategy Update